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Is your insurance company charging you more for being loyal?

Jessica Mullen

Most industries like to reward their most loyal customers.

But a consumer watchdog says more and more auto insurance companies are punishing loyalty, by charging a higher premium for it. 

The practice is known as "price optimization." 

Bob Hunter is a former Texas insurance commissioner, who's now with the Consumer Federation of America.

He says insurance companies have access to a huge amount of data on customers, from what kinds of food they buy at the grocery store, to whether they switched recently from Direct TV to Comcast.

Insurers crunch that data and come up with an index that indicates how likely a customer is to switch if her rates go up.  The index can be used to adjust rates up, if the company believes the customer will stay.

"It's really profit maximization," says Hunter. "Insurance companies have never strayed too far from the rule that rates are established based on your risk. So if you're a bad driver, you pay more. But price optimization takes those rates and alters them based on your shopping behavior. So if you're loyal, you're going to pay more."

Hunter says insurance companies using price optimization have charged some customers nearly a third more for insurance, compared to other, less-loyal customers with the same risk profile. He says nearly half of insurance companies now use price optimization, and the number is likely to increase in the future.

The National Association of Insurance Commissioners is investigating price optimization. Three states have also passed laws to try to prevent insurance companies from using unrelated factors such as loyalty when setting rates.

Hunter says Allstate uses price optimization, and he believes Farmers Insurance does, too. (Neither company responded to questions about whether they increase rates for loyal customers who are unlikely to switch.)  Insurance companies don't divulge whether they use price optimization, so it remains hidden from  insurance commissioners as well as customers.

The Consumer Federation of America believes the practice is illegal, and should be explicitly banned by states. But consumers can still do something on their own, by shopping for a better rate when hit by an unexplained rate increase from their current insurer.

"It's like a third world country where you haggle over the price of trinkets," says Hunter. "But with insurance, the prices are not supposed to be so variable."

Tracy Samilton covers energy and transportation, including the auto industry and the business response to climate change for Michigan Radio. She began her career at Michigan Radio as an intern, where she was promptly “bitten by the radio bug,” and never recovered.
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